Proposed Acquisition

Mothercare PLC
30 April 2007

For Immediate Release                                              28 April 2007

 

                           Proposed Acquisition                              

                                       Of                                       

                    Chelsea Stores Holdings Limited ('CSHL')                    

                                       By                                       

                         Mothercare plc ('Mothercare')                          

                          (the 'Proposed Acquisition')                          

                                                                                

Summary

The directors of Mothercare are pleased to announce that they have agreed terms
for the Proposed Acquisition of CSHL, which owns and operates the Early Learning
Centre ('ELC'), for a total consideration of £85 million. The consideration will
be in the form of new Mothercare ordinary shares and the assumption of CSHL's
net debt of approximately £36 million.

Highlights

•       Following completion of the Proposed Acquisition, Mothercare will own
and operate 'Early Learning Centre' as well as 'Mothercare', two specialist
brands closely associated with children and parenting. The directors of
Mothercare (the 'Directors') believe that both brands have a reputation for
specialism, quality, safety and innovation in their respective product
categories. With complementary target customers and product offerings, the
Directors believe that the brands will fit naturally together.

•       The Directors expect the enlarged group to deliver annual pre-tax
synergies of at least £8 million in the second full financial year after the
date upon which the acquisition becomes effective. Synergy benefits are expected
from:

         I. Optimising the enlarged UK store portfolio: Complementary 
            product offerings and additional geographic reach for
            both brands will provide benefits, particularly through:

            • Extending ELC into out-of-town locations, where it currently has
              limited presence;

            • Extending both brands into additional catchments where there is
              currently only one brand, via web-in-store, concessions or 
              product inserts; and

            • Rationalising and right sizing the combined property portfolio,
              particularly in catchments where both are represented.

        II. International expansion: There will be opportunities to extend the 
            global reach of the enlarged group, which will have
            420 international franchise stores; through the introduction of the 
            brands into countries where one or the other brand is not currently 
            located.

       III. Buying and sourcing: Margin benefits are expected to arise through 
            improved sourcing and in-house design capabilities and
            the combination of Mothercare's sourcing operation in India with 
            ELC's sourcing operation in Hong Kong.

        IV. Direct and marketing: There is scope to leverage the established 
            catalogue and growing internet businesses of both
            brands, which combined will represent a £60 million turnover  
            business in its own right, through linked websites, combined 
            databases, joint marketing and operational efficiencies.

         V. Cost efficiencies: Given the complementary nature of the two 
            businesses there is an opportunity for efficiency improvements
            and cost savings, through the rationalisation of certain central 
            functions and supply and distribution activities, particularly in 
            the UK.

•       The Proposed Acquisition is expected to be earnings enhancing in the
first full financial year after the date upon which the acquisition becomes
effective.(1)(2)

•       During the 52 week period ended 6 May 2006, CSHL generated EBITDA(3)
of £6 million and adjusted EBITDA(3)(4) of £10 million.

•       For the 52 week period ending 5 May 2007, CSHL's EBITDA(3) is forecast
to be approximately £7 million and adjusted EBITDA(3)(4) is forecast to be
approximately £10 million.

•       The consideration for the Proposed Acquisition, totalling £85 million,
will be in the form of new Mothercare ordinary shares and the assumption of
CSHL's net debt on completion, currently valued at approximately £36 million.

•       The agreed valuation of the Mothercare shares to be issued as
consideration, based on a Mothercare share price of 361.45p(5), was
approximately £49 million on 18 March 2007. As a result of the rise in the
Mothercare share price since 18 March, based on yesterday's closing share price
of 406.25p the value of the new Mothercare shares to be issued as consideration
would be approximately £55 million, giving total consideration of £91 million.

•       CSHL currently has three stores branded as Daisy & Tom, one of which
is in the process of being closed. Following the completion of the Proposed
Acquisition, the Daisy & Tom brand will be retained by one of CSHL's current
shareholders.

Commenting on the Proposed Acquisition, Ben Gordon, Chief Executive of
Mothercare said:

'Mothercare and the Early Learning Centre are each specialists in their own
markets and the combination of these two brands will create a key destination
for parents of babies and young children. The Proposed Acquisition creates
exciting opportunities for Mothercare's UK and international multi-channel
businesses, enables significant synergy benefits and will be earnings enhancing
in the first full financial year. Having completed Mothercare's turnaround and
put strong foundations in place to grow the business, the time is right to make
this important strategic step.'

Commenting on the Proposed Acquisition, Nigel Robertson, Chief Executive of CSHL
said:

'Mothercare and ELC working together makes perfect sense. Both brands are
recognised for innovation, quality, safety and integrity. We are excited by the
opportunities the deal brings for ELC both in the UK and overseas. The
complementary nature of the two brands, along with our combined considerable
experience in the children's toy sector, means customers can look forward to
continued high quality products and service from two of the best loved
children's retailers in the UK. This is a great opportunity for both businesses
and the people who work in them.'

Shareholder and regulatory approvals

The Proposed Acquisition is conditional upon the approval of Mothercare's
shareholders at an extraordinary general meeting and upon clearance from
relevant regulatory authorities.



Current trading

Mothercare issued its pre-close trading update in respect of the 52 weeks ended
31 March 2007 on 4 April 2007. The statement is available on the Investor
Information section of the website, www.mothercare.com.

 
For further enquiries, contact:
 
Mothercare:                                                           01923 206 001
Ben Gordon, Chief Executive                                                        
Neil Harrington, Finance Director                                                  
                                                                                   
Citigroup Capital Markets Limited (Financial advisor to Mothercare):  020 7986 4000
Ian Hart                                                                           
Louise Stonestreet                                                                 
                                                                                   
Brunswick (PR advisor to Mothercare):                                 020 7404 5959
Susan Gilchrist                                                                    
Anna Jones                                                                         
                                                                                   
CSHL:                                                                 01793 831 300
Nigel Robertson, Chief Executive                                                   
Gavin Jones, Finance Director                                                      
                                                                                   
Goldman Sachs International (Financial advisor to CSHL)               020 7774 1000
Christos Tomaras                                                                   
Anne Perez                                                                         
                                                                                   
Financial Dynamics (PR advisor to CSHL):                              020 7831 3113
Jonathan Brill                                                                     
Billy Clegg                                                                        
 
 

Notes:

 

(1) Earnings before exceptional items, amortisation of intangible assets and the
impact of movements in the fair values of forward currency contracts recorded in
accordance with IAS 39.

(2) This statement does not constitute a profit forecast and should not be
interpreted to mean that the earnings of Mothercare in the financial year in
which the Proposed Acquisition completes, or in any subsequent period, would
necessarily be greater than that in the preceding financial year.

(3) Prepared in accordance with IFRS and Mothercare's accounting polices.

(4) Adjusted EBITDA excludes Daisy & Tom operating losses, non continuing
investor costs, exceptional items and the impact of movements in the fair values
of forward currency contracts recorded in accordance with IAS 39.

(5) The average of the closing share prices of Mothercare ordinary shares in the
five business days prior to 18 March 2007, the date on which Mothercare
announced that it was in discussions with CSHL regarding the potential
acquisition.

(6) Store numbers are stated as at 27 April 2007.





                              Proposed Acquisition                              

                                       Of                                       

                    Chelsea Stores Holdings Limited ('CSHL')                    

                                       By                                       
                          Mothercare plc ('Mothercare')

                          (the 'Proposed Acquisition')                          
 
Introduction

On 18 March 2007, Mothercare announced that it was in discussions regarding a
possible acquisition of CSHL, owner of the Early Learning Centre. Today,
Mothercare announces that it has agreed to acquire CSHL for a total
consideration of £85 million, in the form of new Mothercare ordinary shares and
the assumption of CSHL's net debt on completion, currently valued at
approximately £36 million.

The agreed valuation of the Mothercare shares to be issued as consideration,
based on a Mothercare share price of 361.45p(5), was approximately £49 million
on 18 March 2007. As a result of the rise in the Mothercare share price since 18
March, based on yesterday's closing share price of 406.25p the value of the new
Mothercare shares to be issued as consideration would be approximately £55
million, bringing total consideration to approximately £91 million.

On completion the CSHL shareholders will own approximately 16 per cent. of
Mothercare's ordinary shares.

The Directors believe that the Proposed Acquisition represents an exciting
strategic opportunity for Mothercare. CSHL is a specialist retailer of toys and
other children's goods. It operates 210 stores throughout the UK, 5 in Ireland
and 89 international franchise stores (including two in the Channel Islands). It
also has a UK-based catalogue and internet platform and operates a small
wholesale business in the UK and internationally.

The Proposed Acquisition offers Mothercare a unique opportunity to enlarge its
business significantly, bringing together two specialist brands, 'Mothercare'
and 'Early Learning Centre', both closely associated with children and
parenting. The Directors believe that the businesses' operations are highly
complementary and they expect the Proposed Acquisition to provide significant
synergy benefits, through optimising the enlarged UK store portfolio;
international expansion; buying and sourcing margin benefits; leveraging Direct
and marketing and cost efficiencies.

The purpose of this announcement is to provide details of the Proposed
Acquisition and explain why the Directors believe it is in the best interests of
Mothercare shareholders. A prospectus in respect of new Mothercare ordinary
shares to be issued and a circular containing a notice to convene the
extraordinary general meeting to seek shareholder approval for the Proposed
Acquisition will be posted to shareholders late in May or early in June.

Background to and reasons for the Proposed Acquisition

Over the last four years, Mothercare has undergone a period of significant
turnaround which has restored shareholder value and laid the foundations for
longer term growth. Over this period, management has focused on driving sales
and profit growth through the expansion of Mothercare's international franchise
operations and its Direct business, streamlining its UK logistics
infrastructure, developing its international supply chain and optimising its UK
store portfolio. Since the start of the programme, a pre-tax loss of £24.8
million (under UK GAAP), for the 52 week period ended 29 March 2003, has been
turned into a pre-tax profit of £24.2 million (under IFRS), for the 53 week
period ended 1 April 2006 and total group sales have increased by 11.8 per cent.
over the same period.

Having stabilised the business, Mothercare is pursuing a strategy aimed at
delivering sustainable earnings growth and value for shareholders. Whilst the
focus of its strategy has been primarily based on organic growth, Mothercare has
also considered investment and acquisition opportunities where they would be
value enhancing for shareholders and consistent with Mothercare's strategy.

The Directors have concluded that the Proposed Acquisition of CSHL represents an
exciting strategic opportunity for Mothercare to increase the reach of its UK,
international and Direct operations and to capitalise on the cross-selling
benefits of having complementary brands and similar customer bases, whilst also
benefiting from cost efficiencies.

The Directors consider the Proposed Acquisition to be in the best interests of
Mothercare and its shareholders, as a whole, and will be recommending that the
shareholders of Mothercare vote in favour of the Proposed Acquisition, as they
intend to do in respect of their own beneficial holdings.

Benefits of the Proposed Acquisition

Following the Proposed Acquisition, Mothercare will own two brands closely
associated with children and parenting. The Directors believe both brands carry
with them a reputation for specialism, quality, safety and innovation.
Furthermore, with complementary target customers and product offerings, the
Directors believe that the brands will fit naturally together.

Toys currently represent about 10 per cent. of Mothercare's UK business. In
combining Mothercare and ELC, that mix will shift such that toys, home & travel
and clothing will each represent about one third of the enlarged group's UK
business.

Mothercare has developed detailed plans for the integration of CSHL into
Mothercare. Based on these plans the Directors expect the enlarged group to
deliver annual pre-tax synergies of at least £8 million in the second full
financial year after the date upon which the acquisition becomes effective.

Mothercare estimates that the exceptional integration costs associated with the
Proposed Acquisition will total £9 million, the majority of which will be
incurred during the two financial years ending 28 March 2009. These amounts
exclude costs associated with store optimisation, which will be estimated
following the completion of store optimisation trials.

Mothercare intends to invest a further estimated £5 million in capital
expenditure in relation to the integration of the two businesses. The majority
of this investment will be made during the period to 28 March 2009. It is
expected that further significant investments will be made, over the next three
years, in optimising the enlarged group's store portfolio. The amount of such
investments will be estimated following the completion of store optimisation
trials.

The Proposed Acquisition is expected to deliver synergies and benefits for the
combined group, in particular:

I. Optimising the enlarged UK store portfolio

Mothercare currently operates from 225 stores and ELC operates from 210 stores
in the UK.

Bringing together the two businesses' different strengths in the toy product
category and, more generally combining Mothercare's home and travel, and
clothing product categories with ELC's more extensive toys' offering, will
provide customers a broader range of products and present a number of
cross-marketing opportunities.

The combination of Mothercare and ELC stores in the UK provides additional
geographic reach for both brands. There is potential for the combined group to
reach additional catchment areas where either one or the other brand is not
currently represented.

ELC currently has limited out-of-town store presence. Subject to successful
trialling, Mothercare expects it to be possible to place ELC inserts in up to 73
Mothercare out-of-town stores, thereby giving ELC access to the out-of-town
market. Mothercare expects that the ELC inserts will improve sales densities in
its stores. There is also the opportunity to extend the reach of both brands
through the enlarged store portfolio, for example, with the use of the
web-in-store capability across all stores.

Mothercare intends to optimise the enlarged group's store portfolio,
particularly in the catchments where both brands are currently located.

II. International expansion

Opportunities exist overseas to extend the global reach of both brands,
initially through leveraging Mothercare's extensive and established franchise
network. The enlarged Group will have 420 international franchise stores
(Mothercare 331 and CSHL 89).

Mothercare currently has franchise operations in 24 countries without an ELC
presence and ELC has franchise operations in one country where there is no
Mothercare presence. In line with Mothercare's international growth strategy,
management intends to work with the enlarged group's franchisees to explore the
opportunities to open additional international stores, both standalone and
combined stores, and extend the global reach of both brands.

III. Buying and sourcing

The Directors believe that margin benefits will arise through increased volumes
in the UK and overseas and improved sourcing and in-house design capabilities.

ELC has an sourcing office in Hong Kong and Mothercare expects that the enlarged
group will be able to leverage this sourcing capability to improve Mothercare's
toys and home and travel business.

IV. Direct and marketing

Mothercare and ELC both have growing internet businesses and well established
catalogue businesses. Combined they represent about a £60 million turnover
business, generate approximately 18 million hits to the web sites and distribute
approximately six million catalogues per annum.

Synergy benefits are expected from linking the Mothercare and ELC websites,
utilising combined databases, cross marketing activities and logistics in areas,
such as, warehousing, call centres and catalogue production cost savings.

V. Cost efficiencies

The highly complementary nature of both businesses is expected to give rise to
efficiency improvements and cost savings through the rationalisation of certain
central functions and supply and distribution activities, particularly in the 
UK.

Integration of CSHL

Mothercare has developed a detailed integration plan covering both businesses
which is designed to allow the benefits from the combination of the Mothercare
and ELC businesses to be realised over three years.

It is intended that the enlarged group will continue to use the 'Mothercare' and
'ELC' brands. In the opinion of Mothercare, the two brands have strong brand
recognition and complement each other. As a result, the integration plan will
focus on combining the operational structures of the two groups in order to
support and enhance both brands.

The integration activity is being planned in three phases with projects in each
of the five main areas being prioritised according to their likely impact and
ease of implementation. The first phase covers the financial year to 29 March
2008, and phases two and three the following two financial years. Integration
activities will be planned to ensure minimal disruption during the key
pre-Christmas trading period.

The plan for the first phase is to focus on quick wins, trials of new store
formats, including ELC inserts in Mothercare stores, and planning for
international growth with the enlarged group's franchise partners.

During the financial year ending 28 March 2009, Mothercare plans to commence the
enlarged Group's UK store optimisation plan and start to leverage sourcing and
cost benefits. During this phase Mothercare intends to commence franchise
operations in new overseas territories.

Mothercare intends to continue the store optimisation and rationalisation
programme through the financial year ending 27 March 2010. By this time, it is
envisaged that integration of the two group's IT systems and supply chains will
be in their final stages.

Information on CSHL(3)(4)

CSHL is a designer and retailer of toys and other children's products for the 0
to 6 year age range, primarily for the UK market although with increasing
international presence. Approximately 80 per cent. of the ELC toys and games
offerings are own brand.

CSHL has 210 ELC branded stores in the UK, 5 in Ireland and 89 international
franchise stores (including two in the Channel Islands). It also -has a Direct
internet and catalogue business and operates a small wholesale business,
providing products to domestic and international customers.

Given its toy focus, CSHL's business is currently highly seasonal with nearly
half of its sales and all of its profits being generated in October, November
and December.

In addition, CSHL currently has three stores branded as Daisy & Tom, one of
which is in the process of being closed. The Daisy & Tom business is currently
loss making. Following the completion of the Proposed Acquisition, the Daisy &
Tom brand will be retained by one of CSHL's current shareholders.

During the 52 week period ended 6 May 2006, CSHL generated revenues of £186
million, EBITDA of £6 million, adjusted EBITDA of £10 million, adjusted EBITA of
£5 million and an operating loss before interest and tax of £3 million. As at 6
May 2006, CSHL had gross assets of £107 million.

For the 52 week period ending 5 May 2007, CSHL's EBITDA is forecast to be
approximately £7 million, its adjusted EBITDA is forecast to be approximately
£10 million and its EBITA is forecast to be approximately £5 million.

Management and employees

During the 52 week period ended 6 May 2006 CSHL had on average approximately
2,600 employees.

Mothercare views the management and employees of CSHL as key to the success of
the enlarged group. Mothercare plans to work with CSHL management to ensure the
smooth integration of the CSHL business into Mothercare. The combination of
Mothercare and ELC will offer both groups of employees exciting career
prospects.

It is the intention of Mothercare to offer positions in the enlarged group to
the people who are best suited to them, regardless of whether they are currently
employed by Mothercare or CSHL, thereby creating a first class combined
management team.

Furthermore, following the Proposed Acquisition, the existing statutory
employment rights of all employees of CSHL will be fully safeguarded.

Financing

It is intended that CSHL's existing debt will be repaid on completion of the
Proposed Acquisition. In order to accommodate the proposed investment in the
enlarged group and the increased seasonality of the business as a consequence of
the Proposed Acquisition, Mothercare has extended its existing revolving debt
facility with HSBC Bank plc to £65 million (at LIBOR plus 1 per cent.).

Financial effects of the Proposed Acquisition

The Proposed Acquisition is expected to be earnings enhancing in the first full
financial year after the date upon which the acquisition becomes effective. (1)
(2)

Current trading

Mothercare issued its pre-close trading update in respect of the 52 week period
ended 31 March 2007 on 4 April 2007. The statement is available on the Investor
Information section of the website, www.mothercare.com.

Terms of the Proposed Acquisition

The Proposed Acquisition is conditional on the approval of Mothercare's
shareholders at an extraordinary general meeting of shareholders, clearance from
the Office of Fair Trading, the approval of the prospectus and the admission of
the new Mothercare shares to the Official List and to trading on the London
Stock Exchange's market for listing securities.

The acquisition agreement can be terminated by Mothercare if CSHL or any of
CSHL's shareholders commit a material breach of their obligations under the
acquisition agreement or if CSHL breaches certain pre-completion undertakings.

The two largest CSHL shareholders can terminate the acquisition agreement if the
mid-market price for a Mothercare share falls below 331 pence and completion has
not occurred on or before 19 June 2007.

The two CSHL shareholders who are to receive the largest percentage of shares in
Mothercare have agreed not to sell their shares in Mothercare for a period of
180 days following completion except through Mothercare's brokers.

Further details of the principal terms and conditions of the acquisition
agreement will be set out in the circular to be sent to Mothercare's
shareholders.

Admission to listing

Application will be made to the UKLA and the London Stock Exchange for the new
Mothercare ordinary shares to be admitted to the Official List and to trading on
the London Stock Exchange's main market for listed securities. Application has
not been, and will not be, made for the new Mothercare ordinary shares to be
admitted to, or to trade on, any other stock exchange.

 

 

 

For further enquiries, contact:
 
Mothercare:                                                           01923 206 001
Ben Gordon, Chief Executive                                                        
Neil Harrington, Finance Director                                                  
                                                                                   
Citigroup Capital Markets Limited (Financial advisor to Mothercare):  020 7986 4000
Ian Hart                                                                           
Louise Stonestreet                                                                 
                                                                                   
Brunswick (PR advisor to Mothercare):                                 020 7404 5959
Susan Gilchrist                                                                    
Anna Jones                                                                         
                                                                                   
CSHL:                                                                 01793 831 300
Nigel Robertson, Chief Executive                                                   
Gavin Jones, Finance Director                                                      
                                                                                   
Goldman Sachs International (Financial advisor to CSHL):              020 7774 1000
Christos Tomaras                                                                   
Anne Perez                                                                         
                                                                                   
Financial Dynamics (PR advisor to CSHL):                              020 7831 3113
Jonathan Brill                                                                     
Billy Clegg                                                                        

 

 

Notes:

(1) Earnings before exceptional items, amortisation of intangible assets and the
impact of movements in the fair values of forward currency contracts recorded in
accordance with IAS39.

(2) This statement does not constitute a profit forecast and should not be
interpreted to mean that the earnings of Mothercare in the financial year in
which the Proposed Acquisition completes, or in any subsequent period, would
necessarily be greater than that in the preceding financial year.

(3) Prepared in accordance with IFRS and Mothercare's accounting polices.

(4) Adjusted EBITDA excludes Daisy & Tom operating losses, non continuing
investor costs, exceptional items and the impact of movements in the fair values
of forward currency contracts recorded in accordance with IAS 39.

(5) The average of the closing share prices of Mothercare ordinary shares in the
five business days prior to 18 March 2007, the date on which Mothercare
announced that it was in discussions with CSHL regarding the potential
acquisition.

(6) Store numbers are stated as at 27 April 2007.

 

Citigroup Global Markets Limited ('Citi'), which is authorised and regulated in
the UK by the Financial Services Authority, is acting for Mothercare and no one
else in connection with the Proposed Acquisition and will not regard any other
person as its client in relation to the Proposed Acquisition and will not be
responsible to anyone other than Mothercare for providing the protections
afforded to clients of Citi, or for providing advice in relation to the Proposed
Acquisition or any transaction or arrangement referred to in this document.

 

Goldman Sachs International ('Goldman Sachs'), which is authorised and regulated
in the UK by the Financial Services Authority, is acting for CSHL and no one
else in connection with the Proposed Acquisition and will not regard any other
person as its client in relation to the Proposed Acquisition and will not be
responsible to anyone other than CSHL for providing the protections afforded to
clients of Goldman Sachs, or for providing advice in relation to the Proposed
Acquisition or any transaction or arrangement referred to in this document.

 

This announcement does not constitute or form part of any offer or invitation to
purchase, otherwise acquire, subscribe for, sell, otherwise dispose of or issue,
or any solicitation of any offer to sell, otherwise dispose of, issue, purchase,
otherwise acquire or subscribe for, any security.

 

Some of the statements in this announcement include forward looking statements
which reflect the Mothercare's or, as appropriate, the Directors' current views
with respect to financial performance, business strategy, plans and objectives
of management for future operations (including development plans relating to
Mothercare's products and services). These statements include forward looking
statements both with respect to Mothercare and the sectors and industries in
which the Mothercare operates. Statements which include the words 'expects',
'intends', plans', 'believes', 'projects', 'anticipates', 'will', 'targets',
'aims', 'may', 'would', 'could', 'continue' and similar statements of a future
or forward looking nature identify forward looking statements for purposes of
the US federal securities laws or otherwise.

 

All forward-looking statements address matters that involve risks and
uncertainties. Accordingly, there are or will be important factors that could
cause Mothercare's actual results to differ materially from those indicated in
these statements. Any forward looking statements in this document reflect the
Mothercare's current views with respect to future events and are subject to
these and other risks, uncertainties and assumptions relating to the
Mothercare's operations, results of operations, growth strategy and liquidity.

 

These forward looking statements speak only as of the date of this announcement.
Subject to any obligations under the Prospectus Rules, the disclosure rules made
by the Financial Services Authority ('FSA') under Part VI of the Financial
Services and Markets Act 2000 ('FSMA') and the listing rules made by the FSA
under Part VI of FSMA and save as required by law, the Company undertakes no
obligation to publicly update or review any forward looking statement, whether
as a result of new information, future developments or otherwise. All subsequent
written and oral forward looking statements attributable to the Mothercare or
individuals acting on behalf of the Mothercare are expressly qualified in their
entirety by this paragraph.




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